Supplier strategies

Objective

The value of suppliers to a business can often be underestimated, and it is part of your role as a leader to understand the transformational impact they can have. It is too easy – and it is lazy – to see suppliers as organisations with whom you ‘spend’ and to regard your relationship with them as one driven by agreeing prices and managing a contract.

Expenditure within business is usually allocated to separate categories for accounting purposes – normally ‘cost of sale’, ‘overheads’ or ‘capital expenditure’. It is better to see this as a total cash cost and to think of your expenditure in categories – for example, all expenditure on information technology or logistics, irrespective of how it is classified by accountants.

The wrong question to ask is:

• How do I reduce the cost of what I am doing?

This implies that all current activities and processes are the right ones, and that the issue is the cost of their delivery. This is an approach which might be better described as purchasing.

The right questions to ask include:

• What processes should I be undertaking?
• Can the processes be simplified?
• Who should undertake the processes?

This is supply chain management. You must have a completely clear view of what you want to achieve – what the deliverables or outcomes are and at what price (these are your definitions of value). You then work with suppliers in partnership on a flexible basis where you are open to any options to deliver value. This is a process that is:

• challenging – you put all assumptions to one side;
• continuous – it never stops, there is always opportunity for further change.

Perhaps the key objective is to realise that suppliers are partner change-agents – their external perspective enables a ‘friendly-critical’ approach in the necessary transformations your organisation will undergo.

Context

Organisations often ask themselves what their core competencies are. Supply chain management will often provoke the consideration of outsourcing – i.e. what can be undertaken by third-party organisations. These two issues can be confused:

• core competencies – these are activities which add value to the customer proposition;
• insourcing or outsourcing – relates to who undertakes tasks and activities.

This is an important distinction because the assumption can be made that a core competence is necessarily insourced – it is not. Frequently the nature of the competence is misunderstood. Take three examples.

• The luxury hotel chain – focusing on the delivery of a premium experience does not mean that it manufactures premium linen; it knows where to buy the linen from.
• The publisher famous for its book designs – focusing on design doesn’t mean that it employs the designers; it has a strong visual brand and it knows how to hire designers to deliver to its guidelines.
• The business school renowned for its high-quality lectures – focusing on quality content and presentation doesn’t mean that it employs the lecturers; it understands what lecture quality is and knows who the best lecturers are.

By taking a flexible and outcomes-defined approach to core competence, you will evaluate supplier partnership opportunities without predefining ‘who does what’.

Challenge

The core challenge you will face is ensuring that within your team or organisation there is a clear understanding about the difference between supplier management, supply chain management, purchase ordering and procurement.

• Supplier management – this is essentially relationship management between vendor and customer and is likely to focus on dealing with long-term strategies and short-term issue resolution.
• Supply chain management – primarily the logistical organisation and integration of all suppliers with a primary focus on inventory and working capital management.
• Purchase ordering – this is the administrative process of placing orders.
• Procurement – this is the strategic approach to vendor management, reviewing process and cost reduction on a constant basis.

Procurement is a professional discipline and is the strategic foundation stone for any effective supplier programme. You must raise its profile and ensure that it is understood that procurement should very often be separated from the functional discipline to which it applies, e.g. IT specialists should not be responsible for IT procurement!

Success

The details of effective supplier management are complex, but they are based on a series of necessary attitudes which, in your role as leader, you need to inculcate within your team.

• Partnership – view the way you work with suppliers as a series of constructive partnerships and not adversarial stand-offs, since both parties gain most from mutual success.
• Relationship – getting the best from your suppliers depends on developing a relationship of trust whereby you progressively learn so much about your respective organisations that they become extensions of each other.
• Procurement – you must see your relationships with suppliers in terms of procurement (as described above); this is first and foremost a strategic perspective.
• Frequency – you must meet your strategic procurement partners on a regular face-to-face basis because this is the only way to develop the mutual trust on which success will be based.
• Strategy and tactics – while these are essentially strategic relationships, you must be prepared to learn, understand, manage and respond to tactical detail. Respect in your supplier relationships will grow if you are seen to get your hands dirty with detail.
• Networks – your business will very likely depend on a number of interconnected suppliers. You must view them as a network or community to be cultivated as a group, sharing expertise and learning.
• Key Performance Indicators (KPIs) – your supplier relationships must be grounded in measurable performance targets, though you should not be a slave to them; they are a guide and not an objective in their own right.
• Shared success – no relationship will be successful unless both parties see it as a success, so your objective should always be to create ‘win–win’ outcomes.
• Contracts – all supplier relationships must be grounded in contractual/legal terms and expectations, but the day you start quoting the contract at each other is the day the relationship starts breaking down.
• Process – you must plan to engage suppliers in all your (relevant) processes with complete transparency. Only then can they fully engage in improvement analysis.
• Responsibility – similarly, you should have no preconceptions about ‘who does what’. Good suppliers will always challenge the status quo and propose alternative approaches.
• Capability – in a world in which technology is driving massive change, you should also make no assumptions about capability. Areas in which your organisation once specialised may become rapidly overtaken by more up-to-date specialisms outside your organisation.
• Feedback – be as prepared to receive feedback from suppliers as you are to give it.
• Learning – above all else, see supplier–partner relationships as a way to learn. Your organisation cannot and will not know all it could and should.

Real success in managing suppliers comes not from programmes of innovation or cost-reduction (though these are necessary outcomes), but from your attitude towards the opportunity they represent.

Pitfalls

Because procurement is a skill set in its own right, it brings with it a specific strategic approach to thinking about the role of suppliers for any given organisation. If you don’t have this specific kind of strategic thinking, the primary risk is that suppliers are seen to be transactional – no more than one element of a number of moving parts in your supply process. With this can come some superficial supplier management attitudes.

• The number – you focus on how many suppliers you have. While this is certainly one index of efficiency, there is no absolute correct number and it can be a diversion from thinking about what you want suppliers to achieve.
• The selection – is based primarily on cost comparisons. While this will always represent a major factor, there is a real risk that excessive focus on cost distracts from a substantial analysis of capability.
• The management – is founded on remote KPI analysis rather than direct supplier engagement. While KPIs are important, they don’t replace active face-to-face engagement on strategy and issues.
• The blame game – when things go wrong (they will!) you resort to blaming suppliers (it’s so easy) without necessarily thinking through all the process issues that may be at fault and to which your organisation may contribute.

Leaders’ checklist

• First and foremost see suppliers as partners not adversaries – they represent a major opportunity to extend your organisation’s talent pool.
• Ensure that your team understands the differences between purchasing, supply chain management, supplier management and procurement.
• Remember that knowledge about a subject doesn’t make you a specialist in negotiating terms to buy it!
• Focus less on the number of suppliers you have and more on the quality and innovation they bring to your organisation.
• Be transparent about the issues and challenges in your team or organisation – openness is necessary to get the best out of suppliers.
• Encourage and enjoy a culture of mutual feedback – you and your suppliers have much to learn from each other.